Many people now have family trusts, for a variety of reasons, but particularly in a tightening economy, one of their significant benefits is the protection of assets from creditors’ claims. However, to be effective, they need to be carefully structured, and carefully utilised. If asset protection is the sole objective in forming a trust, the court can “unwind” the transactions necessary to establish the trusts.
Of course, once the trust is set up, it has to acquire the assets that you seek to protect, and then the trust still has to pay for them. Payment is usually made by forgiving the debt, on the balance of the purchase price outstanding, by way of a series of Deeds recording the amount forgiven, until the debt is finally fully forgiven. While the forgiveness process is under way (and it may take many years), the person transferring the asset still has an asset – the trust’s promise to pay the outstanding balance. That asset is available to creditors, until the debt is forgiven, and the specified timeframes under the insolvency legislation have passed. In other words, that the assets are in a family trust does not mean that the creditor has no remedy. The existence of family trusts is no determinant of the availability of assets. There is an associated issue, when looking at obtaining security, however. A personal guarantee is often regarded as a form of security (and it is). But if the guarantee is from someone who has no assets (because they are already in a family trust, for instance), then what value does it have?
Family assets should not be compromised by business trading. However, banks often require security for business loans against the family home. In those circumstances, the Property (Relationship) Act should be borne in mind. It can itself be used as a mechanism for protecting assets. Indeed, there is a good argument that Property (Relationship) Act agreements are a precondition to any effective asset protection planning. Any issue affecting relationship property, has to be determined in accordance with the principles of the Act. This opens the way to (for instance) ring-fence relationship property from business risks (against relationship property). The business operated by one spouse (or partner) can be separated out from the home, thus leaving the other spouse’s interest in relationship property free from any attack that could be mounted based on a failure of the business. As long as the couple are not both active in the business, this is probably the single most effective means of protecting at least a residue of personal assets.
Once you have a problem regarding the solvency of your business, it is then probably too late to embark on an asset protection scheme. Any asset protection steps taken when debts cannot be paid as they fall due can be unwound by the Liquidator or Official Assignee in bankruptcy. In other words, the time to plan is when times are good. Accordingly, if your business is still in a strong positions, and you haven’t got any asset protection we strongly suggest you talk to us.